Late Tax Return Filing May Mean Reduced Social Security Benefits

Late filing your tax returns? Here’s another reason to quickly get into compliance: You may be missing out on future social security benefits. Social security calculates retirement benefits based on earnings reported. While the Social Security Administration (SSA) directly gets earnings information from form W-2 (wages), it does not directly receive earnings from self-employment activities, which are provided to SSA by the Internal Revenue Service (IRS) after an individual’s tax return is filed and processed.

Those who pay self-employment tax, which typically occurs with sole proprietors filing a schedule C to report their income or partners filing a schedule E to report their income, will lose out on future social security benefits if the return is filed too late. Individuals must file their tax returns by April 15 of the fourth year, following the year in question. The original due date of the return, as well as extensions, are not taken into account. SSA’s due date is specifically three years, three months, and 15 days after the close of the preceding calendar year. For example, the 2018 tax return must be filed by April 15, 2022 in order to get credit with SSA for self-employment earnings.

For non-filers, the IRS has the authority to create a substitute for return (SFR) where the IRS computes tax, based on the information it has available An SFR is not considered a tax return under a variety of IRS and bankruptcy statutes. As the body of law SSA uses to determine timeliness of filing, specifically state “tax return,” we must conclude conservatively that this means only the filing of a tax return and not the IRS production of an SFR. Thus, even if a taxpayer agrees with the results of an SFR, it is to the taxpayer’s advantage to still file a tax return within the time period prescribed by SSA.

Each year, SSA makes available to everyone with a social security number a statement showing the earnings per year and future estimated benefits. This statement used to be mailed, but now only available online.

Even if you are certain all tax returns were filed on time, you should still review your statement online to be sure it accurately reflects your earnings. Failing to catch mistakes or omissions in time could result in a permanent reduction to future benefits. Fixing errors or omissions is easy, if you are able to furnish the tax return that reported those earnings and prove that the return was filed within the aforementioned time period. But if a tax return is filed too late, the future social security benefits associated with it are gone forever.

Schedule a consultation with an experienced Aprio advisor to discuss your tax needs.